Ep. 7: Cryptocurrency with Mark Peck

Mark Peck, Director of Business Development at Rocket Dollar and cryptocurrency investor gives a brief overview of the benefits of crypto in a tax-advantaged account and explains the allure of crypto.

Thomas: Mark, let's take it back to the very beginning. When did you become interested in the crypto space? When did you realize it was something that you wanted to become? You're fairly well-educated on it at this point, but when did your interest sort of begin?

Mark: Sure. I was lucky enough to be introduced to the idea at the beginning of 2015. Had some colleagues and some friends out in the Bay Area in San Francisco and part of the Silicon Valley ecosystem. I kept hearing again and again commentary from them and the topic coming up... In particular about Bitcoin at the time, but just in general, this idea of blockchain technology, the use of digital ledgers as a store of value, and all of the futuristic things that could be achieved with this technology. I found it really exciting and interesting, not being a technologist myself. What caught my attention and I think still has sort of captivated my points of interest in the space are really around the investible side of it. How this can be used as an investment mechanism both for individual users who are trying to acquire stores of value. As well as in our industry, how is this going to affect the enterprise value in the way the businesses work around the space?

Thomas: Yeah, makes sense. For those not super familiar with how cryptocurrency works, can you walk us through a little bit?Everybody talks about cryptocurrency and blockchain interchangeably it seems, but what's really the mechanism really driving the crypto space? I mean, tell us a little bit about how the technology works, why it's so secure, and why it makes sense to store digital assets on a blockchain.

Mark: Yeah, absolutely. In its most fundamental basis, these are sets of technologies and algorithms that have been created based off the idea of a shared ledger. A shared irrefutable record of transactions and ownership that could be then applied through that technology to all different sorts of areas of our life to maintain and store value, pieces of property, pieces of intellectual property, a wide variety of real life tangible use cases. The advent of Bitcoin in particular has led the charge in people's understanding and concept of how that blockchain and digital ledger technology could be applied.

Bitcoin itself has really taken on the lead characteristics of a store of value. People have been using that as a way to get off the fiat dollar, regulated currency space that's sponsored by government agencies, and engage with a store of value that's fully digital. That's something they can access and see irrefutably through technology. Bitcoin has been the predominant store of value and the predominant blockchain technology that's really encompassed and come to represent the entire space for most investors and folks who aren't super familiar with it.

Thomas: When we think about cryptocurrencies, I think most people immediately think about Bitcoin. Even though there's, at this point, hundreds if not thousands of different cryptocurrencies and different types of cryptocurrencies, I think when most people think crypto, they think Bitcoin. Let's focus on that for the time being. Just walk us through a little bit of the history of Bitcoin, how it came to be and why it's sort of exploded in popularity in recent years?

Mark: Sure. That's where Bitcoin really led the charge as a technology and a use of blockchain. Bitcoin itself was originally started in 2009 and the open source software was released to the public. There's been some uncertainties and still a lot of unknowns around the person or group who started Bitcoin, but it's generally referred to the original writer was Satoshi Nakamoto. Satoshi Nakamoto released this open source code that was the first real use of the blockchain technology. In doing that, he had allowed for the mining of and acquisition of one of the 21 million Bitcoin keys or crypto coins.

That's really where this whole path started, particularly in the minds of the public. Where the fundamental store of value for Bitcoin itself has really developed into sort of it's own animal, if you will, away from those other hundreds or thousands of examples of different coins in particular. The long debate that's occurred around Bitcoin, the validation and refutation of some of the technology and the points along the way have really just made that the focal point for everybody's debate around the space. Whether or not the technology is the best sort of version to exchange value and to be a store of value to replace existing fiat dollars remains to be seen. But for now, Bitcoin is really the predominant trading mechanism or transaction mechanism for almost everybody within the crypto digital asset universe. It's certainly at front of mind for both investors and as well as people who are just watching the space to see how things develop.

Thomas: Yeah, that makes sense. One of the things that I think is exciting to me and also scares me about Bitcoin is that it's not really backed by anything. Correct?

Mark: Exactly. You are just simply engaging in an exchange of value. More than anything we've seen in modern financial times where previously, you had governments that had benchmark currencies traditionally benchmarked to the price of gold. Once the United States and the rest of the monetary system went off the gold standard in the 1970s, you began to have floating rate fiat exchanges and values. The US dollar being the predominant transaction mechanism in the world currently, the value of those dollars is set by an extraordinary number of variables. Really, they all come together to sort of move those markets against other currency stores of value.

What's pretty exciting but also gives folks a lot of pause is that exact issue you just mentioned. There is no government agency. There is no legal entity or a construct backing up the value of any of these one coins. It's simply an acknowledgement by two parties or more that they can use to exchange for certain goods and services.

Thomas: It seems like the price is defined as a classic supply and demand sort of curve where there's 21 million of these things that are ever going to be created because of the algorithm written by Satoshi. It's basically, what am I willing to pay for it? What are you willing to sell it for? That's exciting because that at scale leads to a really fair transaction if you will. But it's also scary because we've come to rely on the US dollar so much that is backed by a government, by an entity. Which to some might be a source of comfort, and to some, it might be a source of concern. Right?

Mark: Absolutely. Even beyond your own political beliefs and political stability views about government agencies, including the US federal government, the monetary policy that's been followed by the Federal Reserve and Central Banks across the world was a policy of loosening in monetary expansion. Which means fundamentally, that the supply can be ever increasing to meet that demand, which is a really just concerning thing to hear. If you're counting on something to be a store of value, it will devalue that thing implicitly based on that behavior.

To your point about Bitcoin being finite, that's a really crucial part of the conversation around supply and demand. You can imagine how you can create in many people's minds a much pure representation of supply and demand that doesn't involve the debt and the political burdens that are hanging on to the legacy system. Whether it's US dollar or Sterling Great British pound previous to that, the euro, some of the Asian currencies. There's all sorts of reasons why those ones have challenges and cryptocurrencies are able to separate themselves from those.

Thomas: Yeah. That makes perfect sense. I think one of the things that's interesting for us being in the US is that we have a relatively stable currency historically. But if you look at places like Venezuela, like Zimbabwe, these third world countries where the currency manipulation is much stronger, I think that really makes the case for a cryptocurrency as even maybe a primary currency that they use. Just because when you are at the whims of these people that are pumping out billions or trillions of pesos or whatever it may be, you have to find alternate ways of storing wealth. I think that's one of the really exciting applications of cryptocurrencies where if a government is restricting access $2, €2, two whatever, cryptocurrency has become really exciting at that point.

Mark: You're spot on with that observation. That's certainly where we see a lot of adoption outside of the traditional financial system. That is the place where you see some pain with the use of Bitcoin. From a user experience, the settlement, if you will, transaction time for an exchange of Bitcoin is quite slow compared to what we're used to with electronic transactions with a Visa or a debit card. Or even the movement of money through an international wire. You're going to be able to beat that amount of time. But typically, the settlement of a Bitcoin transactions is around 30 minutes. It's not particularly agile or able to be used in a daily point of sale transaction where you're maybe purchasing and transacting five to 10 times a day.

That's where it gets a little bit tricky. That is a place where other technologies that are using blockchain and different coins can actually be a far better choice for that individual in a country that might need to use the asset to actually transact with on a daily basis. That's where Bitcoin has some limitations. It goes back to the idea that we're really still in the early stages here. The final versions of how this shakes out and what will be predominant in the market is still very much up in the air.

Bitcoin happens to be the predominant store of value for most folks across the world, but that's really more from a brand name reputational value, if you will, compared to some of these other coins that are actually far better suited to the transactional needs of somebody living in one of those countries.

Thomas: Interesting. Yeah. It really comes back to the thought that this is a relatively new space. We haven't figured out everything about it. It is exciting to see just different uses of it in things that maybe we don't imagine in our daily lives because we are lucky enough to live in a country where our currency is relatively stable and is also used as a benchmark around the world. It's a pain that we don't necessarily deal with, but the rest of the world might.

Moving on a little bit, let's talk about... I want to talk about cryptocurrencies and Bitcoin as a purely investment mechanism. You're not transacting with it. It's just a store of value. Correct? Walk us through how you buy Bitcoin. How do you acquire Bitcoin or cryptocurrency?

Mark: Right. Another exciting part about this whole space is that really, these types of transactions can be performed outside of the banking system. You do not need a third party provider or a bank source to necessarily transact with these digital assets, which is inherently, again, part of the appeal. But more often than not, folks like myself even need some help with the functionality. As I got interested and started to work through the space, 2016, 2017 and wanting to make my first sets of investments, there's a lot of knowledge and understanding that needs to come with some of these transactions. If you are not a technologist or somebody who's deeply comfortable with factual mechanisms themselves, you often need some assistance.

Most folks turn to an exchange or what may be known as a market maker in a more traditional stock or bond setting. Right? Somebody who can help you make that market in particular starting off with let's say US dollars in this case, to then exchange those dollars for a cryptocurrency coin. A lot of market providers have really built a big business about helping people like myself who understand what they're doing but don't know enough about it to necessarily feel comfortable transacting directly on their own to give them those guardrails and give them those access points.

There have been some really exciting and high growth companies that have come along across the world to offer exchange and those market making functions. Most of those are what we would refer to as a centralized exchange. That exchange is bringing in assets and counterparties and acting as that middleman to really settle transactions between them. In many ways, very similar to a lot of the financial institutions that are legacy companies across Wall Street and the rest of the financial world. They're acting in that same capacity as a trusted third party to help bring in your dollars, let's say. Find a cryptocurrency seller, exchange those dollars for Bitcoin, and to help ensure the settlement of and the clearing of that trade. Even though that some of those mechanics aren't required and aren't necessarily regulated into the space, that's what that provider is really doing. Most folks are coming together and engaging through a centralized exchange.

Now, where that gives some discomfort to users in this space is that that takes away some of your control and your ability to maintain full custody or ownership over your digital keys and assets. If you're using a third party provider, let's say a centralized exchange, after following an investment or following a transaction, they're holding those assets on your behalf. You're entrusting that company to hold your unique and very important digital keys for the coins you just transacted in. That's where a lot of further questions and options come up. But at its most simplest form, what most folks are doing right now is they're exchanging US dollars or some other fiat currency, euros, through a centralized exchange into a crypto coin or digital asset. That's the starter introduction, a starter investment transaction that most people begin with.

Thomas: Okay. That makes sense. While there is a way to do it completely without an exchange, most people including myself use an exchange where basically it's very easy to do. For example, I use Coinbase. For me, it was as easy as going on to Robinhood or E*TRADE and buying a stock. It's a pretty easy transaction to complete.

Mark: Exactly right. Coinbase is one of the predominant names in the space. There's been a few others that are really competing upon, some, their geographic jurisdiction. For instance, in the United States, it's difficult for exchanges and some of those providers, which are typically classified as money transmission services and a few other number of regulatory oversight designations that the ACC would place upon them or the FCC. Those really make a big difference about where that provider can transact and who they can assist.

There have been another set of companies that are internationally based that really service that international population we talked about earlier but may not be licensed properly in the United States for US domestic investors to use. Or may not have made it through some of the hurdles that are in place in Europe and some of the continental guidelines there. They maybe have a really robust exchange business that's international but not able to transact in particular markets. Whether it'd be in Asia, the US, there's limitations there. Quite a few companies in the US have focused on building out their own business and building out that aspect of security and that confidence that they're building as a third party provider. Right?

Gemini Trust out in New York city has been a name that's been championed as well because of their willingness to work within the New York State financial services framework, which is a pretty heavy lift for most crypto companies and early stage adopters. There's only a few companies that can really handle trading across the whole world. It's a difficult thing to do. That's where some limitations come in as well. It's not just the product, if you will, that they offer you, but where they offer it and how holistic that solution is.

Thomas: Yeah. I think that's a perfect segue into talking a little bit about what we love to talk about on a daily basis. That's Self-Directed accounts and how easy it is to hold cryptocurrencies and any other type of asset in a tax-advantaged retirement account. How easy is it to buy a cryptocurrency with a Self-Directed IRA or 401k?

Mark: Yeah. Well, the answer in the short run is it's been fairly difficult over the past few years to get good access to those types of assets. There have been some solutions that have been brought to market, but a lot of them have some shortcomings in one way or the other. Certainly a great idea to try and transact through a tax-advantaged account. As we just discussed, the IRS is generally treating these like investments. You're subject to capital gains treatment. Doing it through a tax-deferred or post-tax Roth account can be a pretty powerful mechanism. The issue up to this point has really been finding a provider to give you that access to the digital markets.

There haven't been a whole lot of them. There've been a few companies that are offering these retirement account vehicles in a prepackaged wrapper where they're helping you open and establish an IRA, move qualified dollars into the account. Then acting as that market maker really or that exchange function on your behalf. They'd go out and they fulfill your desire to trade US dollars for Bitcoin. Then they go out and perform that trade for you. Then they're holding that asset on your behalf. Though that ultimately achieved the goal of exchanging dollars for Bitcoin, let's say, in your IRA, it provides a lot of friction along the way for the client. First of all, there haven't been a lot of robust choices about what providers to work with. The very limited number means you're only talking to a few different companies. Those that do perform that function have traditionally done so in a very limited scope.

You could probably only buy Bitcoin. You couldn't purchase a different type of coin or digital asset with your dollars. The spread or the commission that you'd be paying on that trade is traditionally extremely expensive. You're often paying a very high percentage as part of the cost basis for your trade so that if you're starting with a thousand US dollars, by the time it's all said and done with transaction fees and commission fees, you're probably only acquiring $900 worth of value into the crypto coins. You lose a lot there on the trading functionality. Again, you lose control because that third party is transacting on your behalf. You're not able to sit there and time your trade as you'd see fit or really have control over the situation, which also bleeds over into the ongoing storage and custody of the coin and the keys.

That's really a crucial part of it that a lot of folks often are uncomfortable with and really would like to find a different solution for. Most of these providers with a turnkey IRA solution, let's say, are not only going out transacting for you and acquiring the key, but then they're holding it for you potentially on their centralized exchange or a shared ledger where they pull all the assets on behalf of their customers. Which means that you have exposure back to that entity and back to any hacks or malicious attacks that would be performed upon your keys or anybody else within their system. You've got a lot of counterparty risk there to the person that you're transacting with.

Despite a lot of those headwinds and despite the lack of choice, there still has been tremendous adoption in the space. That we've seen thousands of folks coming over the past few years and open up retirement accounts explicitly for the purpose of transacting in digital assets and specifically cryptocurrencies. It's still working very well from an adoption perspective, but it's clear that people need some better choices. That's really what lends itself to the model that Rocket Dollar champions, is that ability to have full control and discretion over the way that your transactions progress.

Thomas: Yeah. That makes perfect sense. Walk us through just why the Rocket Dollar's model of how we approach retirement accounts makes it so much easier. Not just for crypto, but for almost any asset that you want to hold. Why is it so much easier with Rocket Dollar versus another provider?

Mark: Yeah. At its simplest level, it's really about the point of ownership and the point of control over who directs the investment activity. In this model of direct custody where the IRA provider holds all assets and directs them for your benefit, you're always beholden to that provider to move dollars and move assets upon your instruction. They can reject or accept those instructions. They can sometimes be very slow to act upon them. What's great about our model of what's often referred to as checkbook control functionality is where you've got a legal vehicle owned by the retirement account that you as the customer are in charge of. You are the only signing authority and directional authority for the assets of the account. You have the ability to point those assets to any third party provider or a third party just for a straight transaction yourself.

Ultimately, when you go through our IRA LLC or 401k trust model, as the Rocket Dollar customer, you're able to go out, establish a new account at one of those exchange providers if you like. Or set up a transaction directly with a third party. Or you could really theoretically take US dollars to your retirement account and transact with a third party for a direct crypto coin acquisition on behalf of your IRA. All doing so without the impediment of having a provider to come back to and go through. The Rocket Dollar checkbook control function alleviates a lot of the transactional pressure and costs as well as it really frees you up to make all of the custody and storage solution choices that you feel best suit your goals.

Thomas: Yeah. That's one of the things that I'm so excited about with our accounts. Is Just the level of control ease. Mark, I think that that's a good place to pause the podcast. But if someone wants to talk about cryptocurrencies in general or in an IRA, and hopefully it is a Rocket Dollar IRA, what's the best way for someone to get in touch with you and have a conversation about crypto maybe one-on-one and in a more individualized way?

Mark: Yeah, absolutely. Well, we filter a lot of questions through our team email box at info@rocketdollar.com. That way, our group of alternative professionals, including myself, are happy to take on and answer questions directly there and set up call opportunities. Thanks for the time, Thomas. People can reach us at info@rocketdollar.Com. Hopefully, we can continue some great conversations there.